Posted on: 01/03/2023
Last week James Clark, Business Development Manager, and Alex Walmsley, Head of Pricing, hosted our popular Generator Revenue Streams webinar. They discussed key headlines and regulatory updates, including an update on solar and wind capture prices; Contracts for Difference Allocation Round 5; and the Electricity Generator Levy. In this blog, James Clark considers the impacts of the latest regulation on independent generators, as well as the opportunities these changes create.
The Evolution of Seasonal Capture prices for Solar and Wind
Capture prices describe the actual power price achieved by a renewable asset in the market. They differ from wholesale baseload prices due to variable generation output caused by weather factors and are typically assessed over a period of time, such as the calendar year or seasonal product.
As renewable capacities grow, we can expect to see a drive in the cannibalisation of power prices. Power price cannibalisation is the concept of renewable energy producers generating large volumes of renewable power at zero marginal costs. This invariably reduces the requirement for fuel-based generation, which have significant marginal costs, and consequently reduces the overall price for that period.
For solar, the discounts between the capture prices and the baseload have grown, which can be attributed to higher underlying wholesale market prices, exacerbating price cannibalisation. For Winter-22, the discount is 3 times larger than observed in the previous winter, driven by the ongoing energy crisis.
Capture prices for wind also follow a similar trend of increasing discounts to baseload. Due to the high wholesale prices, when we see periods of high wind, we also see a very significant price cannibalisation effect, and we expect to see this trend continue as wind capacities grow.
Electricity Generator Levy
Announced as part of the Autumn Statement on 17 November, the Electricity Generator Levy is a 45% tax put in place to recoup funds from renewable generators who are currently benefitting from the returns of the extraordinarily high wholesale prices. This is because renewable and nuclear electricity generators can sell electricity at the high prices determined by the cost of gas generation, without being exposed to rising gas input prices.
The levy came into effect on 1st January 2023 and will remain in place until 31st March 2028, replacing the proposed Cost Plus Revenue Limit. It will affect companies and groups of companies that undertake electricity generation in the UK that are generating more than 50GWhs per annum, reduced last month from 100GWhs.
The Levy is expected to raise £14 billion between 2023-2028 to help pay for the £55 billion of Government support for households and business energy bills.
> Read more about the Electricity Generator Levy
Updates on Contracts for Difference AR5
The Contracts for Difference (CfD) scheme is the government’s main mechanism for supporting the deployment of low-carbon electricity generation. The scheme uses auctions, otherwise known as ‘Allocation Rounds’, and the fifth allocation round is planned to open in March 2023. This will be the first CfD round to run annually, following the success of Allocation Round 4 (AR4) in 2022.
In previous years, all generation technologies were grouped into one of three pots. However, following an announcement in December setting out the core parameters of AR5, the government has streamlined the pot structure. Offshore Wind has now moved from its own distinct pot into Pot 1 with other established technologies. This means Solar PV and Onshore Wind will now directly compete against Offshore Wind. The announcement also released the administrative strike prices, which remain low in the £40-50/MWh range for established technologies.
> Read all the latest news and information on CfD AR5
If you were successful in the latest CfD AR4 auction round and are looking to secure a PPA contract, please contact us to find out more about the long-term PPAs we offer that align with the commercial terms of your CFD commitment, providing new build projects with a viable route to market and a bankable PPA partner.